In Paul Martin’s 1998 federal budget, the CPP was moved on from pay-as-you-go financing. Ottawa jacked up contribution rates from slightly more than 6% of pay to 9.9% (subject to a maximum dollar value). The increase allowed for both the demographic bulge of boomers heading for retirement and the additional cash flow needed to make up for past miscalculations.
John MacNaughton, who had recently retired as the president of investment firm Nesbitt Burns, became CPPIB’s first CEO. On his watch, a portion of the cash coming in from CPP contributions was moved into the equity market in a broad-based index portfolio.
The CPPIB had to take on risk to make better returns, it was true. But in the opinion of early members of the CPPIB team, making all the equity investments in Canada would be a whole other type of risk, written into federal pension laws that allowed only a small percentage of equity portfolios to be invested internationally. That was fixed with a change of the law in 2005, and since then the fund has been able to buy anything that is legal in Canada.
Under David Denison, who has been CEO since 2005, CPPIB has proven its savvy in passive equity investments and also lately in private equity. In fact, in less than a decade, CPPIB has stepped up a league, and it’s Denison who gets the credit for turning the fund into a respected global giant. With the possible exception of the Caisse de dépôt et placement du Québec, it has eclipsed all the other major Canadian public pension funds, some of which have been in business much longer. That league includes Teachers’ and OMERS in Ontario, PSP Investments and British Columbia Investment Management Corp.
Many major funds now share what was originally a provocative (and, we’d like to think, made-in-Canada) idea, of which CPPIB was an early adopter: Instead of paying outside fee-taking managers, practise do-it-yourself mega-investing. It’s just cheaper to do it that way. But that works for the long term only if you’re smart enough to keep up with your competition. Unfortunately, everyone else on the planet now has the same idea.
CPPIB’s quest, stated most simply, is to find long-term investments that have predictable cash flow. “Long-term” to CPPIB is decades. It doesn’t matter if anyone at CPPIB likes music (EMI), or drives cars on toll highways (Ontario’s Highway 407), or makes video calls to Uzbekistan (Skype). They know lots of people do, and that means cash flow, and cash flow for a long, long time means sustainability. When you think that way, EMI really was a good investment idea: Sales of recordings are down, but song-publishing rights can produce consistent revenues from year to year.
Starting this July, CPPIB will have a new leader—current head of investment Mark Wiseman. There’s a reassuring continuity here. For the last seven years, Denison and Wiseman have been a design-and-execute team as the fund has morphed and grown. “I think Denison’s legacy was that he raised the bar for other pension funds in Canada,” says Tim Hodgson, a former head of Goldman Sachs Canada who helped Denison and then Wiseman rise through the investment ranks. “Mark and David taught a bunch of people how fast you can move in investments. Firms like ADIA [Abu Dhabi Investment Authority]can take as long as six months to make up their mind.” CPPIB’s relative speed is a competitive advantage, Hodgson says.
Denison is all about process. Wiseman is all about events. Denison, although taciturn by nature, has made it a habit to meet every new employee in the firm personally. Given the growth of the staff, what started out as one-to-ones has grown into group breakfasts. At Fidelity, where Denison was head of the Canadian operations, he was known as a superintelligent but control-obsessed manager. He has apparently mellowed in the Canada Pension job. But the bone-thin executive still gets up at 4:30 to run 10 kilometres before he shows up for work at 7:30.
The design-and-execute team is now just execute. At 42, Wiseman looks too young for the job until you check his resumé. A lawyer and Fulbright Scholar who also has an MBA, he started his career with a dream legal job—apprenticing as a law clerk for Supreme Court Justice Madame Beverley McLachlin in Ottawa. Wiseman then moved to Paris with his girlfriend, Marcia Moffat, and worked on deals with storied Wall Street law firm Sullivan & Cromwell.